Posts Tagged ‘William Tell’

Last week I offered a video which showed the actual positions of an AAPL options portfolio designed to gain as much as 100% over the next 4 weeks. While it probably won’t be quite that good, we might come close.

The first week was encouraging. We had been hoping that AAPL would stay flat or move slightly higher. It had a great week, moving up by $20.29, or about 4%.

Our little portfolio gained 35%, almost 9 times as much as the stock gained. Ironically, we would have done better if the stock had not gone up so much.

This week I would like to show the actual trades we made last week to get set up for next week, and our current positions. I am sending this to you earlier than usual in case you might like to duplicate these positions in your own account on Monday.

Enjoy the videos.

Interesting AAPL Stock Options Strategy – Week 2

A week ago, the original positions were set out in an actual account carried out at Terry’s Tips. The YouTube link is http://youtu.be/6J9KPuimyXk

It is important to click the lower right-hand corner of the YouTube video to enlarge it to full-screen mode. Otherwise, you can’t see the numbers.

I like Apple. I think the stock will at least hold steady, or might go up over the next month. If it does, I expect to double my money with an options strategy I have just set up. Today I would like to share that strategy with you in a short video. Check it out here – Interesting AAPL Play Using Weekly Options

I hope you will enjoy it.

Interesting AAPL Stock Options Strategy

In spite of the big run-up in the price of AAPL since it announced blow-out earnings that exceeded all expectations, I think the stock has more room to go up. It is still undervalued by traditional investment measures. The problem is that people can’t believe that the largest company in the world can continue to grow as fast it has over the last couple of years.

And it keeps doing better than even the highest expectations.

I think it has a good chance of continue going higher. I expect that the rumors may be right – they will announce the iPad 3 early in March, and maybe a new television system using the cloud. And maybe they will start paying dividends. What else do they plan to do with the spare $100 billion they have sitting in cash?

If they start paying a dividend, there are many mutual funds out there who would love to own the stock but are prevented from doing so because their charter allows them to only but dividend-paying stocks. No matter how small the dividend might be, millions of dollars will pour into the stock once dividends are declared.

My little options strategy should make over 35% a week for the next 4 weeks if the stock holds steady or goes up moderately (actually, if it goes up a little, the weekly gain could be closer to 50%). Spend a couple of minutes checking it out – Interesting AAPL Play Using Weekly Options

Last week I shared the actual positions we held in what we call our Shoot Strategy portfolio (which uses AAPL as the underlying). Last week was a great one for AAPL. The stock rose 7.3%. Our portfolio gained 22.1% after commissions, or more than 3 times the amount the stock went up.

One of the potential problems of the options portfolio is that the stock goes up too fast. When that appears to be happening, as it did in Apple last week, adjustments need to be made. We will talk a little about those adjustments this week.

Terry

Making Adjustments to the Shoot Strategy

First, let’s repeat the table of the actual positions we started with at the beginning of last week:

You can see that all of the short calls (at the 460, 465, and 470 strike prices were out of the money at the beginning of the week (i.e., at higher numbers than the stock price).

Early in the week, the stock started moving higher, and the 460 short call became well in the money, so we needed to make an adjustment. This is the first move we made:

The first trade generated a large stash of cash (about $3300) which we used to buy two new calendar spreads at the 470 and 475 strike prices. The stock continued to climb, and we had to adjust again on Wednesday. This is the Trade Alert we issued on that day:

We sold our deepest in-the-money Apr-12 call as we bought back the lowest-strike Feb-12 short call and used the proceeds to buy a calendar spread (going all the way out to May) at the 480 strike. The stock continued to move higher, and we had to adjust once again on Thursday. This is the Trade Alert we issued on that day:

The first trade took off another Apr-12 call and we used the cash to buy two vertical spreads, rolling our short calls to a higher strike. We did not have enough cash to make a third vertical spread purchase, so we sold a diagonal, trading the Feb-12 475 short call for a Mar-12 495 call. Again, moving our short calls to higher strikes to keep up with the surging stock.

The stock continued higher, and we issued a second Trade Alert on Thursday:

The first trade was designed to generate sufficient cash to be able to buy two vertical spreads, rolling up the short Mar-12 480 calls to the 500 strike. And the stock continued higher, necessitating the third Trade Alert for Thursday:

Admittedly, there is a lot more work involved with adjusting the option portfolio than there is just owning the stock. That is why most of our subscribers who mirror this and our other 7 portfolios sign up for the Auto-Trade program at thinkorswim and have all the trades made automatically for them (there is no charge for this service at thinkorswim other than the commissions, which are also only $1.25 per contract for Terry’s Tips subscribers).

Was it worth all this effort? It was a magnificent week for AAPL owners. The stock soared 7.3%. Lots of smiling faces all around. Meanwhile, our options portfolio gained 22.1% after commissions, or more than 3 times the gain made by the owners of the stock. At the close Friday, our portfolio had grown from $12,141 to $14,829 in a single week. Since we started this portfolio with $5000 some 20 months ago (we withdrew $2000 along the way), AAPL has gained 85% while our portfolio has done 3.7 times as well, gaining 317%.

We think this extraordinary better performance is worth the extra effort we have to put in. Investors who owned the stock over this time period would have seen their $5000 grow to $9250 while our options portfolio has grown to $16,829. Stock owners would have gained $4250 while we gained $11,829.

This may sound confusing, or maybe even too good to be true, but Terry’s TipsInsiders are generally not confused, and they know full well from experience that these results are real. We feel that we have definitively proved that an options portfolio can significantly outperform the outright purchase of stock if you pick a stock that goes up.

Actually, we are a little confused why anyone who really believes in a particular stock would buy shares in it rather than setting up an options portfolio like this one. Do you understand why? Other than it taking a little more work? Surely, learning a little about options is something that could pay off every year for the rest of your life. Why not start off right now by clicking here?
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Any questions? I would love to hear from you by email (terry@terrystips.com), or if you would like to talk to our guy Seth, give him a jingle at 800-803-4595 and either ask him your question(s) or give him your thoughts.

You can see every trade made in 8 actual option portfolios conducted at Terry’s Tips (including William Tell) and learn all about the wonderful world of options by subscribing here. Why wait any longer to make this important investment in yourself?

Two weeks ago, Apple announced blow-out earnings that pleased just about everyone who follows the stock. Since that time, AAPL has soared by 9.2%. Owners of the stock are celebrating.

Meanwhile, the actual options portfolio we carry out at Terry’s Tips increased in value by 42.5% over this same time period. Options outperformed the stock by more than 4 times.

Today I will share with you the actual option positions we hold in this portfolio, and show the potential gains (or losses) that lie ahead. This is an important report that I hope you will read carefully

Why Owning Options Beats Owning Stock

In April, 2010, we set up a $5000 portfolio to demonstrate that a well-designed options portfolio could substantially outperform the outright purchase of stock. We selected AAPL as the underlying, a company we thought had a good future.

We never imagined that future would be quite as spectacular as it has been so far. The stock has skyrocketed by 72% since then. Meanwhile, our options portfolio has gone up by 263%. Our subscribers who mirrored our portfolio from the very beginning have gained over 3.5 times as much as they would have if they had merely purchased shares of AAPL.

We withdrew $3000 of the original $5000 so new subscribers could mirror the portfolio with a smaller investment. The original investment, now $2000, as grown to its present value of $12,141 in 21 months. Not bad by any standards, if we do say so ourselves.

How did we do it? Quite simply, we bought call options with a few months of remaining life and sold call options with only one month of remaining life against these positions. The shorter-term calls we sold to someone else decay at a faster rate than the longer-term calls that we own. This gives us a major advantage over anyone who has just gone out and bought shares of stock.

In options terminology, we created a portfolio that maximized net delta (the equivalent number of shares of stock we own) as long as there was positive theta (which means that the portfolio would make a small gain every day that the stock remained absolutely flat).

Here are the actual positions of this report from our weekly report sent to paying subscribers:

If you spent $12,141 (the portfolio value) to buy stock, you could purchase 26 shares. The net delta of this portfolio (117) means that we own the equivalent of 117 shares, or over 4 times as many as the stock owners control. Meanwhile, theta ($32) means that we are collecting a sort of dividend of $32 every day that the stock remains flat. We don’t actually get a check for that amount, but that is how much the portfolio should gain from the different decay rates of the long and short options in the portfolio.

Here is the risk profile graph which shows the gains (or losses) that this portfolio should experience when the current short options (Feb-12) expire on February 17, 2012 at the various possible stock prices. (Note: If the stock moves sharply from its present level, we would make adjustments to the portfolio that would shift the curve in the direction the stock had moved.)

The graph shows that the portfolio should gain over 15% in two weeks if the stock remains absolutely flat or goes up by about $10. Surely, this is a better place to be compared to what the stockholders have. If the stock stays flat, they will not make anything.

If the stock falls about $5 in two weeks, the owners of stock would lose that amount while the portfolio should break even. If the stock falls about $10 in two weeks, the options portfolio would do just about the same as the owners of stock would do. If it falls more than $10, the options portfolio would suffer a greater loss than the stock would, but we would have made an adjustment to reduce or eliminate that possible loss (by rolling down short calls to lower strike prices).

This may sound confusing, or maybe even too good to be true, but Terry’s Tips Insiders are generally not confused, and they know full well from experience that these results are real. We feel that we have definitively proved that an options portfolio can significantly outperform the outright purchase of stock if you pick a stock that goes up.

Actually, we are a little confused why anyone who really believes in a particular stock would buy shares in it rather than setting up an options portfolio like this one. Do you understand why? Other than it taking a little more work? Surely, learning a little about options is something that could pay off every year for the rest of your life. Why not start off right now by clicking here?

Last week I recommended an options spread on AAPL prior to its earnings announcement on Tuesday. The spread would have made money if the stock fell, remained the same, or rose moderately. The only scenario where a loss would take place was if it shot considerably higher.

I believed that since the stock had already gone up $50 over the last month, much of the expected earnings blow-out had already been priced into the stock.

I was wrong, and the stock soared about $40 on the announcement. Today I would like to discuss what we did about it.

Update on Last Week’s Apple Trade

If you missed last week’s trade, this is what it was:

Buy to Open 1 AAPL Feb-12 440 call (AAPL120218C440)
Sell to Open 1 AAPL Jan4-12 435 call (AAPL120127C435) for a debit of $1.05 (buying a diagonal)

The stock shot up to about $452 on Friday. We had to buy back the Jan4-12 435 for about $17 ($1700). We retained the Feb-12 440 call, and sold a Feb1-12 450 call, collecting $3 ($300).

This left us with a diagonal spread that will be worth a minimum of $1500 if the stock ends up any higher than $450. We could earn more than that if it stays flat or moves slightly higher so we can sell more premium in the next two weeks.

With the stock up again this morning, we have recovered about $300 of our loss. Here is what the risk profile graph looks like with our current positions:

The graph shows that in the next 4 days we should recover up another $400 or so if the stock stays above $450 (it is trading about $452 right now). We have the opportunity to sell new Weeklys against the Feb-12 435 call for the next two weeks, so additional gains could easily come our way. We have a very good chance of covering our loss from last week’s trade.

I apologize that this graph (and our manner of contending with a bad trade) is confusing. Unless you are familiar with option trading, it should be confusing. I hope you will continue receiving this free newsletter anyway. Other reports should make more sense to you.

In spite of having 3 of last week’s suggested trades in our actual Terry’s Tips AAPL portfolio, the portfolio gained 25% last week and is now up 170% since we started the portfolio 20 months ago. This is more than 2 ½ times as great as AAPL has gone up over this period, proving once again that an options portfolio can seriously outperform the outright purchase of stock (if you pick a stock that goes up).

This week I will share an options play that we are taking in advance of tomorrow’s earnings announcement by AAPL. If you think it is a good idea, you will have to place the trade before the market closes Tuesday, January 24, 2012.

Options Tip Of The Week

Expectations are sky high for Apple. The company reports earnings for the 4th quarter tomorrow, and Christmas sales are rumored to be through the roof. People have reported long lines for a month at Apple retail stores.

Demand is so high for iPhones in China that hordes of country dwellers have been hired to take a train to a city to buy a single iPhone (payment $16 for a day’s “work”) but the stores don’t have enough products so many people were turned away. A riot broke out and the stores were eventually closed (the website stills sells their products, but you wonder why they hire buyers if consumers can buy online).

It is always a good sign for a company when the biggest obstacle to success is making enough of the products rather than selling them.

On a fundamental basis, AAPL is trading at less than 11 times forward earnings, an extremely low number for a company growing at 39% a year (although it may be more than this amount – we will know tomorrow).

So will the stock skyrocket on Wednesday after the earnings announcement? The answer is an unequivocal “maybe, maybe not”. Expectations are so high that investors may be disappointed no matter what the numbers are. The stock has gone up about $50 in the last month in advance of the announcement. Maybe it will be another “buy on the rumor and sell on the news” event, and the stock falls in spite of the good news.

Terry’s Tips subscribers are already happy about our AAPL portfolio. It has gained 136% since we started in April 2010, well more than double the increase in the price of the stock.

Here is the trade I am proposing to make right now (we did several similar to this last week in our AAPL portfolio).

Buy to Open 1 AAPL Feb-12 440 call (AAPL120218C440)
Sell to Open 1 AAPL Jan4-12 435 call (AAPL120127C435) for a debit of $1.05 (buying a diagonal)

This trade will cost $105 (plus a commission of $2.50 at the rate paid by Terry’s Tips subscribes at thinkorswim). There will also be a maintenance requirement of $500 because the strike price of the long side (440) is higher than the strike price of the short side (435). The broker holds your cash aside to protect against the maximum possible loss you might incur.

When the Jan4-12 435 call expires next week, if the stock is trading below $435, you do not have to do anything. That call will expire worthless, and you will be left with a long 440 call which has 3 remaining weeks of life. No matter how low the stock might fall, it is unlikely that this call will be selling at less than $1.05 (your original cost). In other words, if AAPL goes up as much as $10 from its current price of $125, or if it falls in value, the spread should make a profit.

If the stock is above $435, you will have to buy back the expiring call and sell the Feb-12 440 call at the same time. It is uncertain what value of the option might be, but unless the stock goes up be an extremely high amount, the Feb-12 440 call should be worth at least $6.05 more than the expiring call so that you can still make a profit.

I hope if you try this little idea and you make a small gain, you will use it to come on board and start your option education for real.

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Any questions? I would love to hear from you by email (terry@terrystips.com), or if you would like to talk to our guy Seth, give him a jingle at 800-803-4595 and either ask him your question(s) or give him your thoughts.

You can see every trade made in 8 actual option portfolios conducted at Terry’s Tips and learn all about the wonderful world of options by subscribing here. Why wait any longer to make this important investment in yourself?

Last week was a bad one for the market. The S&P 500 fell 3.5%. Six of the 8 portfolios carried out at Terry’s Tips made gains last week. Once again, our subscribers where happy that they owned options rather than stock.

One of the two portoflios that lost money is not carried out with our basic strategy, but is a proxy for owning stock in AAPL (which fell over $12 last week, obviously causing a loss).

Our 10K Bear portfolio gained almost 10% for the week, and now has gone up over 70% since we started it 5 months ago (SPY has fallen 7.5% over that time period). This portfolio continues to be a good hedge against other investments which do best when markets move higher.

Today I would like to update the report I sent out last week on a $1479 investment which we believe should make 5% a week.

Update on 5% a Week “Conservative” Portfolio:

Three weeks ago, we made the following trades in one of our portfolios as a demonstration of an option play that we believe will make at least 5% a week after paying all commissions. At the time, SPY was trading just about $125:

Buy To Open 1 SPY Jan-12 132 put (SPY120121P132)
Sell To Open 1 SPY Dec2-11 125 put (SPY111209P125) for a debit of $6.98 (buying a diagonal)

Buy To Open 1 SPY Jan-12 118 call (SPY120121C118)
Sell To Open 1 SPY Dec2-11 125 call (SPY111209P125) for a debit of $7.05 (buying a diagonal)

These two spreads cost us a total of $1403 plus commissions of $5 (the commission rate for Terry’s Tips subscribers at thinkorswim). It is an interesting option play because the deep in-the-money Jan-12 put and call together will be worth at least $1400 (their intrinsic value) when they expire on the third Friday in January (7 weeks after we made these trades). Since we only paid $1408 for these options, as long as we don’t have to buy back any short options we might sell against them, we are guaranteed to collect at least $1400 when they expire in January.

An interesting additional feature of this portfolio is that if the stock manages to make a big move during the 7 or so weeks of the long options’ existence, the original long put and call might be able to be sold at the beginning of the final week for well more than their intrinsic value. The closer to one of the original strike prices the stock becomes, the greater the additional time premium will be. Of course, if the stock moves outside the original range (118 – 132), the total value would exceed the original intrinsic value of $14 (again, as long as the short options continue to be out of the money).

We will have 6 opportunities to sell Weekly puts and calls using the Jan-12 options as collateral for those sales. Any money we collect from selling those options is pure profit (unless they end up in the money and we have to buy them back on the Friday that they expire).

Since the options we sold were both at the 125 strike price, one of them would have to be bought back on Friday, December 9th (unless SPY closed exactly at $125.00, an unlikely event).

As we reported a week ago, the portfolio gained 6.2% after commissions in its first week, and we started out last week being short a Dec-11 SPY 127 call (which we had sold for $1.28 and a Dec-11 SPY 126 put (which we had sold for $1.99). If we would be lucky enough for the stock to remain in the $126 – $127 range all week, the $324 we collected (after commissions) by selling these two options would be pure profit (a whopping 22% on our original investment in a single week).

The secret of success to this little strategy is in the adjustments that invariably need to be made because the stock usually doesn’t stay perfectly flat all week. Last week was no exception. SPY fell $4.46. Ouch!

When SPY fell over $2, we bought back our short 126 put and sold a 123 put which also expired on Friday, December 16. Buying this vertical spread cost us $181 after commissions, but our net cost was reduced by what we gained by selling a vertical spread on the short 127 call, replacing it with a short 124 call (this sale gained us $104 after commissions). So we had now lost $77 of the potential maximum $324 gain for the week.

On Friday, we had to buy back the in-the-money 123 put, paying out $133, and we bought back the out-of-the-money 124 call for $1 (no commission charged at thinkorswim for this trade). These trades reduced the potential maximum gain by $134. For the week, then, we gained $113, or 7.6% on the original investment of $1479 ($1408 plus an adjustment cost) three weeks earlier.

At the outset, we said that we expected this little investment would gain us an average of 5% a week, and we have exceeded that goal in each of the first two weeks. Going into the third week, we have collected $127 from selling a 121 put which expires on December 23 and $142 from selling a 122 call which expires on that same day.

If SPY ends up between $121 and $122 this Friday (and no adjustments become necessary), we could earn $269, or 18% on our original investment. (At the end of the day last Friday, these two options were worth a total of $253, so we had already picked up a paper gain of $16).

Here is the risk profile graph for our positions, indicating the loss or gain next Friday at the various possible prices for SPY. Of course, if SPY fluctuates by $2, we would make an adjustment as we did this week, and hopefully turn a possible loss into a gain (as we did last week).

If you can follow the above trades, you have a good understanding how we carry out our portfolios at Terry’s Tips. If this strategy can indeed make 5% a week (and there is the possibility of much more), we wonder why anyone would be buying stock or mutual funds rather than investing in an option strategy similar to this.

Many of our subscribers are mirroring our trades in this portfolio (or having thinkorswim make the trades for them through their Auto-Trade service). Last week they were all happy campers.
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Any questions? I would love to hear from you by email (terry@terrystips.com), or if you would like to talk to our guy Seth, give him a jingle at 800-803-4595 and either ask him your question(s) or give him your thoughts.

You can see every trade made in 8 actual option portfolios conducted at Terry’s Tips and learn all about the wonderful world of options by subscribing here. Why wait any longer to make this important investment in yourself?

This week I would like to describe an actual option play we made two weeks ago which you should be able to duplicate with no more than a $1600 investment. We believe it will make at least 5% a week for the six remaining weeks of its existence.

We are pleased that every one of our portfolios made nice gains last week. The average portfolio gained 7% after commissions in spite of fairly high mid-week volatility. We were especially happy with our bearish 10K Bear portfolio – it gained 13% even though SPY ended up going up by 1% last week. Our William Tell portfolio (using AAPL as the underlying) gained 8.7% while AAPL rose 1%.

An Interesting “Conservative” Option Purchase That Could Make 5% a Week:

Two weeks ago, we made the following trades in one of our portfolios as a demonstration of an option play that we believe will make at least 5% a week after paying all commissions. At the time, SPY was trading just about $125:

Buy To Open 1 SPY Jan-12 132 put (SPY120121P132)
Sell To Open 1 SPY Dec2-11 125 put (SPY111209P125) for a debit of $6.98 (buying a diagonal)

Buy To Open 1 SPY Jan-12 118 call (SPY120121C118)
Sell To Open 1 SPY Dec2-11 125 call (SPY111209P125) for a debit of $7.05 (buying a diagonal)

These two spreads cost us a total of $1403 plus commissions of $5 (the commission rate for Terry’s Tips subscribers at thinkorswim). It is an interesting option play because the deep in-the-money Jan-12 put and call together will be worth at least $1400 (their intrinsic value) when they expire on the third Friday in January (7 weeks after we made these trades). Since we only paid $1408 for these options, as long as we don’t have to buy back any short options we might sell against them, we are guaranteed to collect at least $1400 when they expire in January.

We will have 6 opportunities to sell Weekly puts and calls using the Jan-12 options as collateral for those sales. Any money we collect from selling those options is pure profit (unless they end up in the money and we have to buy them back on the Friday that they expire).

Since the options we sold were both at the 125 strike price, one of them would have to be bought back on Friday, December 9th (unless SPY closed exactly at $125.00, an unlikely event).

Two days after we bought the two spreads, SPY shot up to $127 (when the stock moves $2 with this strategy, we make an adjustment because we do not want any of our short options to become more than $2 in the money). These are the trades we placed:

Buy To Close 1 SPY Dec2-11 125 call (SPY111209C125)
Sell To Open 1 SPY Dec2-11 127 call (SPY111209C127) for a debit of $1.33 (buying a vertical)

Buy To Close 1 SPY Dec2-11 125 put (SPY111209P125)
Sell To Open 1 SPY Dec2-11 127 put (SPY111209P127) for a credit of $.67 (selling a vertical)

We paid out $133 to roll up the short call from the 125 strike to the 127 strike, and collected $67 when we rolled up the short put from the 125 to 127 strike. After commissions, these two trades cost us a net $71.

The stock then fell back to $125 and we reversed the last put trade (but did not bother rolling down the short call to the 125 strike, electing to let it expire worthless):

Buy To Close 1 SPY Dec2-11 127 put (SPY111209P127)
Sell To Open 1 SPY Dec2-11 125 put (SPY111209P125) for a debit of $1.11 (buying a vertical)

This trade cost us $113.50 including commissions. When we bought back the soon-to-expire short options on Friday (paying no commissions since thinkorswim does not change a commission to buy back a short option for $5 or less), we paid out another $8, making the total outlay $1600.50 ($1408 + $71 + $113.50 + $8).

At last Friday’s prices, our long Jan-12 options were trading at a total of $1705.50, indicating that we had gained $105 for the week, or 6.2% after commissions.

At the outset, we said that we expected this little investment would gain us an average of 5% a week, so for the first week, we are right on target.

For the second week, we collected a total of $324.50 by selling a Dec-11 126 put and a Dec-11 127 call which will expire next Friday, December 16th. By the end of the day, their value had fallen to $252.25, so we had already made some of the gain we expect for the second week. If the stock ends up between these strikes (126 and 127) and we don’t have to adjust mid-week, the entire amount (about 20%) could be profit.

Here is the risk profile graph for our current positions. It shows the expected loss or gain at the various possible prices where SPY might be on Friday (remember, if the stock moves by $2 in either direction, we will make an adjustment similar to those we made in the first week), and the curve will move in the direction that the stock moved. Some of the potential gain will be erased when adjustments are made.

If you can follow the above trades, you have a good understanding how we carry out our portfolios at Terry’s Tips. If this strategy can indeed make 5% a week (and there is the possibility of much more), we wonder why anyone would be buying stock or mutual funds rather than investing in an option strategy similar to this.

Many of our subscribers are mirroring our trades in this portfolio (or having thinkorswim make the trades for them through their Auto-Trade service). Last week they were all happy campers.

This week we will ignore the looming European debt crisis for a minute and talk a little about one of the “Greeks” – a measure designed to predict how option prices will change when underlying stock prices change or time elapses. It is important to have a basic understanding of some of these measures before embarking on trading options.

I hope you enjoy this short discussion.

A Useful Way to Think About Delta

The first “Greek” that most people learn about when they get involved in options is Delta. This important measure tells us how much the price of the option will change if the underlying stock or ETF changes by $1.00.

If you own a call option that carries a delta of 50, that means that if the stock goes up by $1.00, your option will increase in value by $.50 (if the stock falls by $1.00, your option will fall by a little less than $.50).
The useful way to think about delta is to consider its value to be the probability of that option finishing up (on expiration day) in the money. If you own a call option at a strike price of 60 and the underlying stock is selling at $60, you have an at-the-money option, and the delta will likely be about 50. In other words, the market is saying that your option has a 50-50 chance of expiring in the money (i.e., the stock is above $60 so your option would have some intrinsic value).

If your option were at the 55 strike, it would have a much higher delta value because the likelihood of its finishing up in the money (i.e., higher than $55) would be much higher. The 55 call might have a delta of 80 or 90 (or if the option is about to expire, it will approach 100). With the stock at $60 and the strike at 55, the stock could fall by $4.99 or go up by any amount and it would end up being in the money, so the delta value would be quite high.

On the other hand, if your call option were at the 65 strike while the stock was selling at $60, it would carry a much lower delta (maybe 10 if expiration is near, or 30 if there are a few months to go until expiration) because there would be a much lower likelihood of the stock going up $5 so that your option would expire in the money.

Of course, the amount of remaining life also has an effect on the delta value of an option. For in-the-money call options, the closer to expiration you are, the higher the delta value. For out-of-the-money options, delta values are higher for further-out expirations. As in many things concerning options, even the most simple measure, delta, is a little confusing. Fortunately, most brokers (especially thinkorswim) show you the net delta value of your long and short options at all times (or the deltas of any options you are thinking of buying or selling).
In one Terry’s Tips portfolio, we have sold December call options for AAPL which expire on December 16th. With the stock currently trading about $395, the Dec-11 395 call carries a delta of 50 (meaning the market is betting that there is a 50-50 chance of AAPL trading above $395 in two weeks, at expiration). We are also short a Dec-11 405 call which carries a delta of 30. The market figures that there is about a 30% chance that AAPL will be above $405 in two weeks. And the Dec-11 415 call has a delta of only 14, so the expectation is that 14% of the time, the stock might rally by $20 over those two weeks.

I bought 11 of these spreads, paying only $163 per spread ($165.50 including commissions at thinkorswim). My total investment was $1820.50. As I said in last week’s report, I expected that the spread would cost less on Monday than it did on Friday, and that was the case.

I chose the 115 strike because that was about half-way between the $112 and $120 that SPY had been fluctuating between for the past several weeks. It started out the week on the downside, falling below $108 at one point on Tuesday. I was a little concerned because when you buy a calendar spread, the maximum gain comes when the stock closes at exactly the strike price you select on the day that the short options are due to expire.

On Friday morning, October 7th, the day that the Oct1-11 116 calls were due to expire, SPY had shot up to over $116. I made two trades in the morning. I sold 6 of the original calendar spreads, collecting $2.19 ($219 less commissions of $2.50, or $216.50 per spread, or $1299.00 total).

If I had sold all 11 spreads at this price, I would have collected $2318.50 for a net profit after commissions of $561.00, or 31% on my investment for one week.

In the second trade, I rolled over the Oct-1 11 116 calls to the next week, buying back the calls expiring that day and selling the Oct2-11 116 calls. I collected $1.30 per spread ($130 less commissions of $2.50, or $127.50 x 5 spreads, or $637.50 total).

I had collected a total of $1936.55 after paying all commissions. This was greater than my total investment of $1820.50 by $116, and I am guaranteed a much greater profit a week from now when I close out the remaining 5 calendar spreads I now own. I could collect as much as $200 per spread if the stock manages to close very close to $115 on Friday.

While I am delighted with these results so far, I could have done much better if I had waited until near the end of the day on Friday. At that time, I could have rolled over the Oct1-11 calls to Oct2-11 calls and collected my entire $1.63 investment back rather than the $1.30 I collected early in the day. (I was afraid that SPY was going up fast and I would gain less if it moved further away from $115 – instead, it fell back closer to the 115 strike at the end of the day.)

Several subscribers have written in to say they tried this spread in their own accounts, many of them picking different strike prices. Happily, some of them who made money on the trades have decided to use $59.95 of their winnings to subscribe to Terry’s Tips where they might learn how to make some really big returns in future months and years.

Here is the special Terry’s Tips offer:

iPhone 5 Introduction Offer: Apple was expected to introduce IPhone 5 on October 4. For the first time, Sprint will be able to sell an IPhone. It could be a big deal for Apple, and all of us who are betting on their stock.
On April 29, 2010, Terry’s Tips set up an actual portfolio to show how an options portfolio could outperform a stock portfolio using the same stock. We chose Apple (AAPL) as a stock that we thought would go up. On the day we set up the portfolio, AAPL was trading at $277.

In the next nine months, AAPL rose 25% and our $5000 starting portfolio value had soared to $10,087 (after all commissions, of course), a gain of over 100%.

Our options portfolio had outperformed the purchase of stock by a huge margin – gaining 4 times as much as the stock gained. Of course, the stock has now gone even higher, and our $5000 portfolio recently surpassed the $12,000 level.

We have written up a special report which shows exactly how we gained over 100% with an options portfolio while the stock rose only 25%. You could easily use this same strategy on any stock of your own choosing, and presumably do as well (assuming that you picked a stock that went higher).

This report is worth many times the price of the entire subscription by itself. Together with my White Paper, this report is a short and complete explanation of how you can use an options strategy to double your money if the stock goes up only 25%

If you sign up by October 11, one week after the iPhone 5 was supposed to hit the shelves, we will discount our introductory package all the way down to $59.95, a full $20 lower than thousands of subscribers have paid.

This is what you get:

1) My 70+ page White Paper which explains my favorite option strategies in detail, including my 10 Trading Rules, and 20 companies to use with the ‘Lazy Way” Strategy, (which guarantees a 100% gain in 2 years if the stock stays flat or goes up).

– A 14-lesson tutorial on trading stock options which will give you a thorough understanding of trading stock options.
– A weekly update of 8 actual portfolios so that you can follow their progress over time.
– Specific trades for each portfolio emailed to you so you may mirror them in your own account.
– Access to historical analytic reports and portfolio updates posted in the Insiders section of Terry’s Tips.
– If you choose to continue after the 2 free months, do nothing, and you’ll be billed at a discounted rate of $19.95 per month.

3) A FREE special report – “How We Made 100% with Apple in 2010-11 While the Stock Rose only 25%.”

With this one-time offer, you will receive everything for only $59.95, less than the value of the White Paper alone. But you must order by October 11, 2011. Click here – http://www.terrystips.com/order.php and enter Special Code iPhone5.

Why wait? Do it today! You will learn a strategy that could pay you back many times over, and do it every year for the rest of your investing life.

Terry

P.S. Receive the special free report entitled “How We Made 100% on Apple in 2010-11 While AAPL Rose Only 25%” in addition to all the other benefits of a Terry’s Tips subscription for the discounted special price of only $59.95, go to http://www.terrystips.com/order.php, and use Special Code iPhone5

Success Stories

I have been trading the equity markets with many different strategies for over 40 years. Terry Allen's strategies have been the most consistent money makers for me. I used them during the 2008 melt-down, to earn over 50% annualized return, while all my neighbors were crying about their losses.

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tastyworks, Inc. and Terry’s Tips are separate, unaffiliated companies and are not responsible for each other’s services and products. Options are not suitable for all investors as the special risks inherent to options trading my expose investors to potentially rapid and substantial losses. Options trading in a tastyworks account is subject to tastyworks’ review and approval. Please read Characteristics and Risks of Standardized Options before investing in options